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Anti-Huawei Stance May Hurt U.S. Tech Companies

Written by: James Rogers10/10/12 - 3:38 PM EDT

Tickers in this article:
COH HPQ AAPL CSCO JNPR

NEW YORK ( TheStreet) -- The damning House Intelligence Committee's report on Chinese network-gear companies Huawei and ZTE may spell good news for rivals Cisco(CSCO) and Juniper(JNPR) , say analysts. But Washington's stance could pose challenges for U.S. firms targeting the lucrative Chinese market.

The 52-page report advocated blocking acquisitions, takeovers or mergers involving Huawei and ZTE, citing the "threat to U.S. national security interests." The committee also said U.S. government systems and contractors should exclude Huawei and ZTE equipment.

"China has the means, opportunity, and motive to use telecommunications companies for malicious purposes," it added.

A Cisco spokesman declined to comment on the report when contacted by TheStreet, although he confirmed that the tech bellwether no longer has an equipment-sales relationship with ZTE. The two companies had a longstanding partnership, although this was reportedly ended by Cisco after allegations that ZTE violated U.S. sanctions by selling its network gear to Iran.

Analysts say the report bodes well for Cisco and Juniper, at least on this side of the Pacific.

"The report is certainly damaging to Huawei and ZTE's aspirations in the U.S.," noted Scott Dennehy, senior analyst at Technology Business Research, in an email. "Cisco and Juniper will benefit -- in addition to making it that much more challenging for Huawei to land U.S. telecom-provider customers, this will extend to the enterprise market as well."

Dennehy added that Huawei has been "very aggressive" in targeting the U.S. enterprise market, focusing on channel partners as its main entry point. "The report will make U.S.-based channel partners much more hesitant to resell Huawei equipment," he wrote.

Perceived as a cheaper alternative to the likes of Cisco, the Chinese equipment makers have been pushing into the U.S. Huawei, for example, opened a 200,000-square-foot R&D facility in Silicon Valley last year.

Paul Mansky, managing director of equity research at Cantor Fitzgerald, says Huawei is still relatively "under-represented" in the U.S. market.

"Structurally, we don't see this as necessarily changing that pre-existing condition ... rather reinforcing it," he wrote. "However, it does clearly remove the risk (for the foreseeable future) of share gain via consolidation (acquisition) and quite possibly reduces the negative pricing pressure Huawei has exerted on domestic markets, as customers play them off their incumbent suppliers."

Clearly, the Chinese firms' stateside plans received a massive setback this week. "Anything that keeps competitors out of the U.S. market is positive for the incumbents," noted Brian White, an analyst at Topeka Capital Markets, in an email.

"So far as the Congressional report goes, it certainly could provide benefits to U.S.-based competitors unless ZTE and Huawei are able to forcefully answer and contradict the findings," added Charles King, principal analyst at technology-research firm Pund-IT.

King also raised the possibility of other countries and jurisdictions following the U.S. example. "If so, and those findings support the claims of the House Intelligence Committee, the results could be disastrous for ZTE and Huawei, and perhaps other China-based IT firms," he wrote. "Whatever those companies lose, reliable players like Cisco and Juniper will be standing by to pick up."